The limits of ‘possibility’: Splitting the lamb-mutton quota for the UK and EU–27

An exercise in applying the “latest 3-year average” rule to the tariff quota on lamb and mutton. International Trade Secretary Liam Fox has announced the UK will “replicate as far as possible” the EU’s commitments in the WTO. This is a sound approach. But how far is “as far as possible”?

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By Peter Ungphakorn
POSTED JANUARY 6, 2017 | UPDATED JANUARY 6, 2017

UPDATE:
The goods schedule for the EU’s enlargement in 2004 to 25 members (EU–25) was certified and circulated in December 2016. Details are here

Expert opinion differs over whether re-establishing the UK’s WTO commitments will be little more than reproducing, as a legal right, those of the present 28-member European Union.

For thousands of legally binding ceilings on tariffs and access to services markets, this is true.

The limits of possibility

The main differences are over “tariff quotas” and possibly some tariffs, and whether these will drag the UK and EU into lengthy and messy negotiations. This even raises the prospect that the “schedules” (essentially lists) of commitments might not be ready at the end of the 2-year Article 50 process of leaving the EU.

JUMP TO

Lamb and mutton — the EU’s tariff quota
Step by step
What does this tell us?
See also
Annex: the data

To keep this as simple as possible, International Trade Secretary Liam Fox has announced the UK will “replicate as far as possible” the EU’s schedule.

The exact meaning of the statement is debated, but essentially it recognises that straight “replication” is possible in many cases but not in some others.

Where it won’t be possible includes almost 100 tariff quotas (pdf) (where limited quantities can be imported duty-free or at a low tariff). It may even include some tariffs.

The EU’s present tariff quota for lamb and mutton (“meat of sheep or goats, fresh chilled or frozen”) offers some clues as to where purely claiming a legal right might work, and where it might break down, dragging the UK and EU into entangled negotiations on each other’s revised commitments, with other countries weighing in.

Incidentally, lamb and mutton are important for trade across the Irish border, which is a particularly sensitive issue in Brexit.

We can walk through the process step by step, remembering that the WTO schedules are default binding commitments in the event there is no free trade between the UK and EU, or between either of them and the rest of the world.

Lamb and mutton — the EU’s tariff quotaBack to top

The EU’s current certified WTO commitment on goods (tariffs, tariff quotas and agricultural subsidies) is for the 15-member EU that existed from 1996 to 2004. It was certified by consensus among all WTO members in 2010, 14 years after the enlargement to 15 members. Commitments for when the EU added new members since then (to 25, 27 and 28 members) have not yet been certified. But, crucially, trade continues.

The EU's WTO certified and EU regulation lamb-mutton tariff quota
Click the image to see it full size

The EU–15’s certified WTO schedule has this commitment for lamb and mutton:

  • It has promised to allow at least 283,825 tonnes to be imported duty-free.
  • Quantities outside the quota can be charged a mixed tariff of up to 12.8% of the price, plus up to €902 to €3,118 per tonne (mostly between €1,000 and €2,000) depending on the cut, whether it is chilled or frozen and so on. The highest rate is on boneless meat.
  • The EU has also reserved the right to apply an additional “special safeguard” tariff on the out-of-quota rate, triggered by a sufficient surge in imports or fall in price.

The tariff quota is almost entirely allocated among 15 countries (some now EU members). New Zealand has almost 80%, with 200 tonnes left over for “others”. When it leaves the EU, the UK will count among those “others” unless the EU sets up a specific quota for the UK. The same applies to the EU in the UK’s commitment.

In practice the quota is now 285,910 tonnes (an increase of 2,085 tonnes or 0.7%) allocated among nine countries, according to an EU regulation from 2011. The regulation says the latest adjustment expands the allocations for Chile and New Zealand, the latter specifically because of the EU’s enlargement to include Bulgaria and Romania (when the EU became 27 members).

When compared with the certified WTO (EU–15) schedule, the figures show adjustments had also previously been made for Australia, Norway, Faeroes, Turkey and Iceland. Clearly the EU had been negotiating with its suppliers over the years and adjusting the quota accordingly, even if the revised schedules still have not been certified in the WTO.

That means it was listening to them as well as asserting its legal rights. It’s almost certainly why the quotas applied by the EU in practice have allowed trade to continue trouble-free.

So the first question is: should the UK’s tariff quota be based on the WTO-certified schedule for the old EU–15? Or should it be based on an uncertified regulation for the EU–28 (or pre-Croatia EU–27, the latest reference in an EU Commission regulation)?

The most pragmatic answer could be to start from the 285,910-tonne quota the EU is using in practice, even though the draft in the WTO is top secret, it’s uncertified and therefore legally uncertain, and it’s untransparent. So, here goes.

How will the lamb-mutton quota be split?
Click the image to see it full size
Step by stepBack to top

STEP ONE: Out of the 285,910-tonne tariff quota, how much should be in the UK’s schedule? And how much in the EU–27’s? About half-and-half according to current data.

The common WTO practice for making calculations like these is to take an average over a recent 3-year period. Borrowing that method: according to EU figures, in 2015 the EU imported 202,271 tonnes from non-members. The UK imported 102,350 tonnes, or 50.6% of that. The figures for 2014 are 187,605 (EU) and 96,845 (UK = 51.6%) and for 2015 they are 199,936 (EU) and 103,718 (UK = 51.9%).

So, the UK’s average share for the three years is 51.4%.

Using that average, the 285,910 tonnes would be split:
146,862 tonnes in the UK’s tariff quota
139,048 tonnes in the EU–27’s tariff quota

STEP TWO: How should the individual supplying countries’ quotas be split between the UK and EU–27?

For New Zealand, which has almost 80% of the quota, the ratio has been similar, but not the same. For example in 2015 (pdf), the UK took up 48% of New Zealand’s exports to the EU. This suggests the quota shares should be calculated for each of the individual suppliers, rather than using the 51%-to-49% UK-to-EU split for the quota as a whole.

So far so straightforward (assuming other countries don’t demand a say — but they might).

STEP THREE: What about UK-EU trade in mutton and lamb? This is where the simplicity may well unravel.

First, accounting for EU-to-UK trade in Britain’s tariff quota. The UK imported an average of 10,917 tonnes from the EU in the three years 2013–2015. Over half was from Ireland. Other major EU suppliers were Spain, France and the Netherlands. The present EU–28 tariff quota does not account for this because the UK is one of the 28. After Brexit — without any additional change — in order to export duty-free to Britain, those EU suppliers would have to fight for a share of the 200-tonne allocation to “other” non-EU suppliers.

So we can expect the EU to demand an additional 10,917 tonnes or so in the UK’s tariff quota.

Ireland and the other EU member states might not be satisfied with that figure, even if it comes from the latest 3-year average. EU exports to the UK exceeded that figure every other year in the 11 years since 2005, except 2011 and 2015, reaching 14,208 tonnes in 2005 and surpassing 13,000 tonnes in 2006, 2007, 2008 and 2013. The average for the three most recent years is dragged down by an unusually low 7,611 tonnes in 2015.

EU to UK exports compared with latest 3-year average
Click the image to see it full size

On the other side, we can expect British farmers to react if they think the additional quota allows too much to be imported, particularly if their ability to export to the EU–27 is hampered.

Cue haggling — within the UK, between the EU and UK, and among EU member states — over which years and which figures to use in the UK’s schedule. Bargaining over which base years to use in a calculation is common in WTO negotiations. It has sometimes produced an “Olympic average” over five or more years, a method that excludes the highest and lowest numbers.

Second, accounting for UK-to-EU trade in the EU’s tariff quota. On the other side, the UK will be interested in the EU–27’s tariff quota. Again the 200-tonne allocation to “others” could not possibly cater for this.

The latest three-year average for EU–27 imports from the UK is 82,576 tonnes, also depressed by an unusually low figure for 2015 — 74,851 tonnes. That average was exceeded every year in the past decade except 2007, 2012 (borderline) and 2015, peaking at 93,667 tonnes in 2009.

UK to EU exports and latest 3-year average
Click the image to see it full size

Around two thirds of UK lamb and mutton sales to the EU goes to France, with significant quantities also going to Germany, Ireland, Italy and the Netherlands. They are the member states that will have to juggle the interests of their farmers against those of their consumers.

Cue more haggling — between the UK government and its farmers as well as the UK and EU, and within EU member states.

What this also means is that the UK will not only be dealing with its own WTO schedule of commitments. The UK and EU–27 will bargain with each other over the size of their respective quotas. In this case that applies even if the EU simply keeps for its 27 members the tariff quota it currently has for the present 28. Otherwise the UK would be forced to fight for a share of the 200-tonne “others” quota.

At this stage, the process has become pretty complicated. And it might not end there.

POSSIBLE STEP FOUR: So, the UK and EU have expanded their shares of the split quota to account for current trade between them. Taking the figures from Step One and adding the latest 3-year averages for UK-EU trade in Step Three would expand the combined UK and EU–27 tariff quota from 285,910 tonnes to at least 379,403 tonnes, an increase of 33%, around one third.)

Would other countries sit by and accept it? Maybe. Maybe not.

By now, the UK and EU would be hard-pressed to argue they are still only “replicating” or “rectifying” their schedules. The alternative, a “modification” (not least because a regional integration pact has ended), gives other countries negotiating rights. They could well demand a say.

For example, they could argue that expanding the combined quota by one-third changes the nature of competition in the two markets. Or, that there is no justification to add into the schedules the figures for UK-EU duty-free trade under the single market, since that relationship will no longer exist — those figures would exaggerate the expected access for the EU and UK into each other’s markets.

Cue even more complicated haggling. And since we are now in schedule “modification” territory, it is conceivable that new suppliers not currently listed in the tariff quota will want their own shares. India, for example, is a significant exporter even if it does not currently sell to the EU.

EU member states’ shares of imports from New Zealand

Click the image to see it full size

FINALLY: What about quota fill? Will the EU and UK seek larger quota allocations than the trade figures suggest?

There is an argument in favour of this since suppliers are rarely able to export their entire quotas to the EU. New Zealand did so from about 2006 to 2009 but is currently running at about 70–80%. If this “underfill” is caused by the way the quota is managed, then there is an argument for a larger quota than the actual traded amount.

What does this tell us?Back to top

So it seems likely that the lamb and mutton quota will lead to simultaneous bargaining over both the UK’s and the EU–27’s schedules, and that many countries will become involved directly and indirectly, including key EU member states as well as non-members.

Is this typical of all the tariff quotas? No. Most have fewer allocated suppliers (if any) and larger shares available to “others” or unspecified suppliers.

But most if not all will also involve steps three and four — expanding the combined quota to allow for UK-EU trade — casting doubt on whether any of these are simply “rectifications”, and allowing other countries to join the negotiations.

As I said when I started writing about this almost a year ago (in AgraEurope), it does not mean the task is impossible. But it does mean negotiations over the UK’s and EU’s schedules will be complicated and may take a long time, particularly since other Brexit activities will already be occupying resources in the four departments involved — Exiting the EU, International Trade, the Foreign Office, and Environment, Food and Rural Affairs.

Finally, will this matter if the UK and EU end up with a free trade deal of some kind anyway? Why not stop after Steps One and Two? If the UK and EU are confident that they will strike a bilateral deal, then including UK-EU trade in the tariff quotas will be less critical. But because the schedules are fall-back positions, it is in the interests of both to ensure the schedules are in a good shape for their own bilateral trade.

See alsoBack to top

Annex: the dataBack to top

This analysis assumes all the imports are via the tariff quota. Getting relevant figures is not easy. The ones used here are from data available on the EU website and from uktradeinfo. They should be seen as a way to approximate what might happen, rather than to give a precise account. Hopefully the officials dealing with this will have quicker means of getting more appropriate data.

The tariff quota in the EU’s latest EU certified goods schedule
WTO document WT/LET/666 (for the EU–15) of 22 February 2010, extract

Description of products Tariff item number(s) Final quota quantity and in-quota tariff rate Other terms and conditions
Meat of sheep or goats, fresh chilled or frozen  0204 283 825 t
(Carcase-weight)
0%
Allocated to supplying countries as follows:

Argentina 23.000 t
Australia 18.650 t
Chile 3.000 t
New Zealand 226.700 t
Uruguay 5.800 t
Iceland 600 t
Poland 200 t
Rumania 75 t
Hungary 1.150 t
Bulgaria 1.250 t
Bosnia Herzegovina 850 t
Croatia 450 t
Slovenia 50 t
Former Yugoslav Republic of Macedonia 1.750 t
Greenland 100 t
Other 200 t

Qualification for the quota is subject to conditions laid down in the relevant Community provisions.

The tariff quota in practice
Commission Implementing Regulation (EU) No 1354/2011, 20 December 2011 (also here)

Description of products Quota quantity and in-quota tariff rate Country allocations (and use 2015)
Meat of sheep or goats, fresh chilled or frozen
0204
285 910 t
(Carcase-weight)
0%
Argentina 23 000 t (534 t = 2%)
Australia 19 186 t (16 493 t = 86%)
New Zealand 228 254 t (174 540 t = 76%)
Uruguay 5 800 (1 785 t = 31%)
Chile 7 400 t (2 503 t = 34%)
Norway 300 t (0 t = 0%)
Greenland 100 t (0 t = 0%)
Faeroes 20 t (1 t = 5%)
Turkey 200 t (0 t = 0%)
Others 200 t (0 t = 0%)
“Erga Omnes” 200 t (195 t = 97%)
(= all origins, including the countries mentioned in the current table)
Iceland* 1 850 t (1 093 t = 59%)

Notes:
Regulation 1354/2011 is an update to previous regulations, increasing allocations to New Zealand and Chile, in New Zealand’s case specifically for EU enlargement to include Bulgaria and Romania
Quota-use is from market presentation available on
http://ec.europa.eu/agriculture/sheep-goats/presentations_en (accessed 11.12.2016) — Committee for the Common Organisation of the Agricultural Market, Market Situation for Sheep & Goats, 15 December 2016 https://circabc.europa.eu/sd/a/c23fa87f-fecf-45cf-91e8-223c5735cc4d/2016.12.15%20Sheep.pdf
* Iceland’s tariff-quota includes additional tariff lines 0210 99 21, 0210 99 29 and 0210 99 60 (processed products such as smoked, salted, cured)


Updates: January 6, 2017: correcting some minor errors
Photocredits
: All public domain CC0. (Flock of sheep close up from USDA Agricultural Research Service.)


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Author: tradebetablog

I used to work on trade issues and am now retired. I am an occasional freelance journalist, focusing mainly on international trade rules, agreements and institutions, with periodic analyses for AgraEurope www.agra-net.com/agra/agra-europe. This blog is for trialling ideas on trade and any other subject, hence “β”. You can respond by using the contact form or tweeting @CoppetainPU — Copyright © Peter Ungphakorn except where stated